5.1 Innovative Financial Mechanism
Financial support will be a critical factor in influencing the spread of SETs. Certainly there is a need for innovative financial mechanisms to support the transfer and diffusion of sustainable technologies. Though a large number of SETs have reached the stage of commercial viability, financing for these technologies still faces numerous challenges. In general, financiers do not show interest in these until there is a sufficient volume of projects with attractive returns. However, one cannot expect to provide large scale business readily.
Under such situations, the mechanism of financing needs to be different and the financiers need to accept incentives other than just profits. Some of the innovative initiatives in the direction of setting up alternate financial institutions include (IPCC, 2000):
While most mainstream financial institutions have paid only a modest attention to the environment, a number of smaller organizations or groups within organizations have made it
a major feature of their activities. These ‘green financiers’ are usually driven, firstly, by the growing number of investors with concerns about the environment and a desire to see their money invested to take account of these concerns and, secondly, by a high level of personal commitment from the professionals involved. These green financial organizations are highly motivated and prepared to work to overcome the problems either independently or in conjunction with the public sector. Some of the following financial mechanisms seem to be amenable for supporting diffusion of SETs.
5.1.1 Leasing: Leasing is a highly flexible form of finance. It is often packaged as a form of
sales financing - i.e., it helps customers of a company buy that company's equipment. Leasing offers potential to be a major source of finance for the diffusion of SETs, particularly to the business community. There is scope to encourage leasing companies to support the diffusion of SETs through selective tax incentives, information sharing and bringing together environmental entrepreneurs and leasing companies.
5.1.2 Venture capital: Venture capital is particularly relevant to the development and transfer
of new SETs. Venture capitalists are prepared to back risky investments in return for high returns and will invest in small companies, such as those who have developed new technology, and/or have difficulties raising capital from most other investors. They can play an active role in supporting technology transfer and diffusion.
5.1.3: Micro-credit: Micro-credit is the provision of small amounts of finance to individuals.
While the basic concept is the same as traditional banking, the attitude to risk is radically different, because micro-credit institutions are prepared to lend to those ignored by conventional financial institutions - those on low incomes or with no assets. Many believe there is substantial scope for adapting and focusing micro-credit to finance the uptake of SETs at household level. However, some flexibility can be introduced to expand scope of micro-credit financing to include investments in SETs.
A key question is how to increase the number of ‘green’ bankers who are more sensitive to borrowers’ environmental needs and the local socio-economic impacts of various projects.
Likewise, how can one change the mind-set of the financial community so that environmental issues can be viewed as opportunities rather than a burden thrust upon them? In this regard, the Clean Development Mechanism (CDM) can be viewed as one opportunity. In the context of CDM as well as other project investments, recognition was given to in-country benefits in the form of significant increases in revenue to the government and the local economy for infrastructure improvement.
5.2 Entrepreneurship development
In order to diffuse SETs in a large scale there is a need for the emergence of a large pool of new age entrepreneurs who are concerned about the environment in addition to making profit in their business ventures. These sets of entrepreneurs will not emerge automatically because the majority does not view SETs as commercially attractive propositions. Therefore it is important to create an enabling environment where such entrepreneurs can emerge and actively play a role in creating businesses in sustainable energy. A climate for stimulating innovation and facilitating meaningful technology diffusion can be created through a change in cultural attitudes and a systems approach that build linkages between education, research, enterprise, finance and the government. Education, training, and research must be geared to relevance, competence, and excellence, to foster entrepreneurship.
Techno-entrepreneurs will be seriously handicapped without the knowledge of: availability of product/process; state-of-the-art, environment friendly energy technologies; national and international Intellectual Property Rights (IPR) laws; national and global marketing arrangements; technology information and expert systems; technical, economic, and commercial viability of projects; and sound principles for managing technology, production, personnel, and finance. The lack of entrepreneurial and technical skills necessary to absorb
advanced technologies will be a major hindrance to setup a modern SET business. Some of this human-endowed capacity-building could be developed through activities which might include technical exchanges, demonstration projects, and education, such as the technology training courses.
Some of the activities that may be undertaken to enhance entrepreneurial skills and interest to become an entrepreneur could be:
• To develop and demonstrate selected technologies to enhance competitiveness, replicability, and assimilation;
• To build capacity through programmes of acquiring and upgrading the new skills and experience needed; and
• An information facility for identifying technology ideas from R&D centres and converting them to business opportunities with services that include, among others, a database on technologies and processes including their sources, prices, inputs, and environmental benefits, as well as information on products and processes patents, market information, and business plans.
There should be a mechanism to provide expert help to the entrepreneurs in analyzing the product design, technical feasibility, financial feasibility, energy demand, environmental impact, and so on. The spread of SETs, especially in the rural areas of developing countries, will greatly depend on the strengthening of local entrepreneurial capacity. This would help sustained commercial operation of rural micro- and small-scale energy enterprises that harness energy technologies and provide quality energy services.
5.3 Innovative marketing mechanism
The diffusion of SETs has to face multitude of problems in the competitive environment consisting of traditional energy technologies. Well-established and cheap conventional
energy technologies and emerging SETs compete against each other within a market. Capital costs of some SETs are too high to allow massive market competition and diffusion. Also, the final output and the services provided by both sets of technologies are the same. Under these circumstances, the positive aspects of SETs like operating cost savings against current high capital cost and GHG mitigation potential may not be attractive enough to push these technologies. Therefore, it is essential to design innovative marketing mechanisms that create more demand for SETs. This can be made possible though the emergence of SET entrepreneurs as energy service providers.
These entrepreneurs have to develop capacity to provide all the energy related services (lighting, heating, cooling, motive power, video/audio, etc) to the consumers. These services have to be provided either by producing energy on their own or by purchasing it from the supplier. Further, all these services can be integrated and marketed as an ‘Energy Service Package’. The pricing has to be based on the whole package and not per unit of energy. This scheme can become successful if appropriate pricing and marketing strategies are adopted.
Also, the reliability of the whole process will be high because of the higher responsibility levels of entrepreneurs to maintain the service package, and losses due to failure will be higher compared to pure energy sales. Such strategies can accelerate the diffusion of SET technologies, thereby becoming attractive investment alternatives for the aspiring entrepreneurs.
5.4 Innovative incentive mechanism
The grants and subsidies from the government (either host or donor country) or donations from international agencies in the present form may not effectively contribute to the fast diffusion of SETs. Programmes (for example, utility supported Demand-side Management) created through such support have influences limited to the programme boundaries. The scope is likely to be limited to demonstration rather than having any diffusion effect. This is
because, in such schemes, the role of the supporting agencies ends once the project using SET is implemented. The implementing agency may efficiently run the programme till such time the support is provided. Once the programme support is over, there is not always an incentive to continue the process. This is true even for subsidies provided to the energy efficient devices at the time of purchase. These subsidies tend to create a distorted market where consumers are accustomed to lower prices and refuse to purchase the efficient devices at higher prices when the subsidies are removed. It is very important that the programmatic or subsidy support does not end just as an effective demonstration of SET. On the other hand such supports should facilitate a continuous adoption of SETs. However, this will happen only if innovations are brought into these support mechanisms.
An incentive scheme, which ensures the first time purchase of an energy efficient device, its continuous and optimal use, and ready purchase of replacement after its life time should be the preferred one. Such a scheme should not be limited by some programmes/projects, and any prospective adopter should be eligible to enjoy these incentives.
Some of the innovations that could be tried with respect to incentives are:
• Smart subsidies: These subsidies influence both the purchase and continuous use decisions. Subsidies need to be used for both discounting the energy efficient device as well as the energy prices for efficient use. However, care should be taken to make these as market ‘attractions’ rather than ‘distortions’.
• Incentives to succeed such as reimbursement of expenditure incurred on the purchase efficient device.
• Mortgaging of energy efficient devices: The efficient device/technology manufactures should encourage mortgaging of SETs.
• Values for saved energy: Credits based on the value of saved energy could be introduced.
• Tax incentives for SET purchase and efficient energy use;
• Energy price discounts for SET adopters.
Another mechanism consists of ‘Green Credits’. The incentives can be paid to the producer/end-user on the basis of per unit of energy produced/saved due to the adoption of SETs. This will encourage them to produce/save more and perform better. Perhaps the most important move in this direction is carbon credits awarded through the Clean Development Mechanism (CDM). CDM provides considerable scope for creative partnerships involving private parties fostering technology transfer for implementing CDM projects. It should, in principle, benefit the developing world through investment in new technology in order to generate certified emissions reductions (CERs) that Annex I parties can use for compliance with their targets.
Finally, loan guarantee schemes can also promote SET projects by small scale entrepreneurs.
In order to help technology deployment, governments can introduce loan guarantee schemes to support domestic small business development. They could consist of the central government guaranteeing loans made by domestic banks to the small business sector to encourage the development of that sector.
5.5 Innovative Service Delivery Mechanism – Energy service companies
Energy service companies (ESCOs) are a specific form of technology intermediary that has gained widespread acceptance globally. An ESCO is a company that offers energy services to customers with performance guarantees. Two ESCO approaches that are observed are guaranteed savings and shared savings. In the guaranteed savings structure, the end-user finances the project's initial investment costs from a financier and, in turn, the ESCO guarantees that the energy savings will at least cover the debt services for which the ESCO receives a share in the net savings. However, if the savings fall short of obligations the ESCO assumes the shortfall. In this case, ESCO assumes risks associated with project's performance
and the third party financier assumes the end-user's credit risk. In the second approach, the shared savings structure, the ESCO finances the project's initial investment costs, usually by borrowing from a third party financier. In return, ESCO is compensated by a higher share of savings from the project (IPCC, 2000).
ESCOs have been successful in many developed countries. However, the risks and the absence of clear success in developing countries are still issues. Nevertheless, energy service companies are operating or being formed in several developing countries (IPCC, 2000). The ESCO concept is very much appropriate for the spread of SETs. The involvement of ESCO could be either as a performance guarantor, where the under performance risk is taken care of or as a financier it self. Some of the other activities that the ESCOs could involve themselves are: raise awareness to target groups and other stakeholders, assist technology producers in marketing, assist in preparing business plans, bring potential partners together, secure intellectual property rights and licenses, educate financers about technologies in channeling investment proposals.